Debt for growth is an ideal alternative finance option for founders to scale their company while reducing the cost of capital and limiting dilution.
Many choose venture debt over traditional equity finance due to flexibility, no dilution or control over the day-to-day direction you take your business.
If you're thinking about revenue-based finance or other debt products to fund your growing SaaS company, here are five questions to ask and key items to be aware of:
1. Is the funding a match for your needs? What are the terms, and how do they fit with what you are trying to achieve? For example, short-term finance (3-12 months) isn't the right answer if you have a two-year plan. Similarly, don't enter into a five-year loan if you have a short-term need for a particular cash constraint.
2. Is the lender clear about the interest rate or cost? In finance, as in life, be wary of those who aren't transparent. Are they upfront about the total interest rate you'll be paying when it comes to a potential lender? Or do they have a headline interest rate that seems attractive, plus expensive fees buried in the fine print that results in a far pricier loan? Some finance offerings are packaged up in different ways, and you need to be able to work back to what the actual cost is over a period. This can be the cash cost (adjusted for time) or an actual effective interest rate.
3. Read the contract. The devil is in the details, as they say. Read the entire document for onerous terms and conditions. And be wary of contracts that are difficult to decipher—that's a big red flag.
4. Get advice. Talk to others who have done it before, whether it's to a lawyer or a finance professional. In fact, doing so may save you from signing what could turn out to be a bad deal. A straightforward lender will be upfront about how best to use their products or if they are even a fit.
5. Remember that cash is king. In a world where money seems to be free, keep in mind that your business will live, and die based on its cash flow. Expensive short-term credit may be tempting, but it can be the enemy of your future cash balance. The avalanche of money in the markets will not last and can limit your ability to stand on your own feet moving forward.
If you are seeking new ways to fund the growth of your SaaS company, talk to us and start the conversation with our finance experts to see whether an Element SaaS Finance loan is right for your business.